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Japan Gain Clouded by Europe Risk

Japanese economy expands at faster-than-expected annual rate of 4.1% in Q1.

May 17, 2012

Japan’s economy expanded faster than estimated in the first quarter, boosted by reconstruction spending that’s poised to fade just as a worsening in Europe’s crisis threatens to curtail export demand.

Gross domestic product rose an annualized 4.1 percent from the final three months of 2011, exceeding all but seven of 27 estimates in a Bloomberg News survey of economists, a Cabinet Office report showed today in Tokyo. Singapore also reported a rebound in growth last quarter, while warning about the risk of a disorderly European debt default.

Policy makers across Asia are girding for the potential impact of a Greek exit from the euro region that could roil the global financial system, with Malaysia’s central bank chief seeing possible “catastrophic” consequences for Europe. South Korea said it has enough currency reserves to weather the storm, while in Japan, pressure may rise to step up monetary stimulus as the government pledged to take action against “excessive” currency moves.

“Japan is on a steady recovery path but this high growth probably won’t continue,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “The Bank of Japan probably wants to wait and see the effect of their monetary easing but as economic data will show more moderate growth going forward, they are likely to face an increase in political pressure for more actions.”

The yen’s more than 4 percent gain against the dollar since mid-March may encourage politicians to keep pressing the Bank of Japan to add stimulus, with the first-quarter expansion likely to mark the peak for the year after a surge in consumer spending.

Europe’s debt turmoil is threatening to disrupt exports and financial markets as Greece teeters on the edge of a euro departure. Greece is heading toward national elections six weeks after an inconclusive vote on May 6, which pushed a political party opposed to the nation’s international bailout into second place, raising the specter of the country leaving the 17-nation euro area.

“The recovery in the global economy remains fragile and vulnerable to downside risks,” Singapore’s trade ministry said today as it reported GDP rose an annualized 10 percent in the three months through March 31 from the previous quarter. “A disorderly sovereign debt default in the euro zone” that would hurt the global economy and Singapore’s export-dependent industries cannot be ruled out, it said.

’Catastrophic’ Result

The consequences of a Greek euro exit would be “unimaginable” and “catastrophic” for Europe, Malaysia’s central bank Governor Zeti Akhtar Aziz said in an interview with Bloomberg Television aired today.

“The worst-case scenario is what we saw in Asia, when one economy collapses, then the market usually moves on to focus on the next one, then there will be a contagion that will affect different countries,” Zeti, 64, said in the interview in Istanbul. “This is what is described by unimaginable and it will be catastrophic.”

Several U.S. Federal Reserve policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery going, minutes of their April meeting released yesterday showed. World Bank President Robert Zoellick said yesterday that a Greek exit from the euro could have ripple effects reminiscent of 2008, when Lehman Brothers Holdings Inc.’s collapse was followed by a global financial crisis.

South Korea will take “prompt” action on markets if needed, Vice Finance Minister Shin Je Yoon said after an emergency meeting in Seoul on the euro-area crisis today. The country has enough foreign-exchange reserves to cope with the fallout, as financial markets may see more turbulence, Shin said.

Japanese Economy Minister Motohisa Furukawa said today there’s no change to the government’s stance on taking decisive action against “excessive” currency moves. The yen’s gain could hurt Japan’s economy and have various downside effects, the minister said, adding he will closely monitor European debt conditions as they are affecting the currency market.

In China, authorities on May 12 cut the reserve ratio for the third time in six months following weaker-than-forecast economic data. Growth in the world’s second-biggest economy is likely to accelerate for the first time in seven quarters, a Bloomberg survey of 21 economists showed.

In Europe, figures are expected to confirm Spain’s economy contracted 0.3 percent in the first quarter, according to a survey of 20 economists. U.S. jobless claims dropped by 2,000 in the week ended May 12 to a six-week low of 365,000, according to the median forecast in a Bloomberg News survey of 48 economists.

Prices paid by New Zealand farms, factories and other producers for commodities and services rose at the slowest pace in more than two years in the first quarter, a report showed today. Hong Kong is due to release April unemployment data.

Growth Estimate

Japan’s economic growth may be 2.2 percent in the second and third quarters, and 1.7 percent in the final three months of the year, according to the average forecast of 40 economists in a Japan Center for Economic Research survey released May 15.

The Nikkei 225 Stock Average was little changed at 1:02 p.m. in Tokyo after sliding 1.1 percent yesterday. Today’s GDP report in Japan revised a fourth-quarter contraction to an expansion.

Japan’s central bank failed yesterday to find enough short- term government securities to buy under its asset-purchase program, signaling complications for efforts to spur growth. Officials may need to buy longer-dated debt or other types of assets.

The BOJ increased the program for a second time in three months on April 27 and some lawmakers are urging more aggressive easing as Prime Minister Yoshihiko Noda struggles to secure support for doubling a 5 percent sales tax to help contain the world’s largest public debt burden.

Europe’s woes may fuel renewed demand for the yen as a haven, with the currency trading at 80.26 per dollar as of 1:03 p.m. in Tokyo after climbing to a postwar high of 75.35 in October. Sony Corp., Japan’s largest consumer electronics exporter, gets a fifth of its sales from Europe.

“The risk will be the yen’s appreciation if the risk-off mode among investors continues,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. in Tokyo and a former BOJ official. “The overseas factors aren’t looking positive for Japan’s economy.”

Noda has pledged more than 20 trillion yen ($249 billion) to rebuild areas devastated by last year’s earthquake and tsunami. Public investment rose 5.4 percent in the first quarter from the previous three months, the first increase in three quarters, today’s report showed.

Subsidy Effect

Government subsidies for purchases of fuel-efficient cars may expire in August, weakening demand later this year, according to Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Consumer spending was the biggest contributor to Japan’s growth in the first quarter, bolstered by the government subsidy program, today’s report showed. Public investment and exports also grew from the previous three-month period.

“The increase in consumer spending would be temporary as it was boosted by the government’s measures,” Muto said. “Given that the jobless rate remains high and wages are near flat, it will be difficult for consumers to increase spending considerably.”

At the same time, Japanese companies plan to increase machinery orders at a faster pace this quarter, signaling some continued domestic support for the economy, a report showed yesterday.

“The positive surprise is that private consumption has come back so strongly, including durable goods,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo who has done research for the Bank of Japan. “With demand now recovering on the back of government action, we should see deflationary trends subside.”

Constraints on energy use may add to economic challenges. Japan may impose rolling blackouts and electricity-savings targets this summer as utilities struggle to power factories and light homes with all nuclear reactors offline.

In Kansai, which accounts for about 20 percent of the economy and is the nation’s second-most important industrial heartland, consumers face the biggest limit on power use, the government says. The western region is home to Osaka, Kyoto and Kobe cities as well as the headquarters of Panasonic Corp., Sharp Corp. and Nintendo Co.

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